Forbes CommunityVoice™ allows professional fee-based membership groups ("communities") to connect directly with the Forbes audience by enabling them to create content – and participate in the conversation – on the Forbes digital publishing platform. Each topic-based CommunityVoice™ is produced and managed by the group.

Opinions expressed within Forbes CommunityVoice™ are those of the participating individuals.

You're Not Too Small To Use An Entity

Bert Seither is the CEO of The Startup Expert ®, the nation's largest business coaching and education company for startup businesses.

Shutterstock

Using an entity makes good business sense, saves you thousands in taxes and protects you from devastating personal lawsuits. So why isn’t making the switch from a sole proprietorship to an entity something that’s second nature to fledgling businesses?

Small businesses, especially startups, think that becoming a business entity is something that only huge corporations do, so the founder generally sets up the company as a sole proprietorship. Even when the company grows and the classification doesn’t change, it can leave the company, board and affiliates vulnerable to lawsuits, resulting in the founder paying a ton of extra taxes out of their pocket.

The distilled definition of a business entity is that it was created specifically to conduct a particular trade or business. It exists for that reason and is divorced from the personal finances and tax burden of its founder. By declaring your company an entity, you shield yourself and your stakeholders from certain ramifications and also establish credibility with potential lenders and board members.

Creating an entity helps you in three key areas.

You Protect Your Assets

Not all entities are created equal, but S or C entity classifications draw a line in the sand that clearly separate your assets from the company’s financials, not counting any initial investment you put into the company. This is absolutely critical because it protects you from lawsuits or business financial disasters that could seep into your personal financial life.

In addition to covering your personal assets, you also create a hospitable environment for shareholders, board members and partners. They can join you without fear of losing their shirts and homes in a lawsuit. Shockingly, many companies don’t offer their board members protection from being personally sued, so if your company is under the umbrella of being an S or C classified entity, you’ll be automatically more attractive to high profile people who will want to serve in an advisory capacity.

You’re Much More Legitimate

When you use an entity, you show that you take yourself and your business seriously. It’s the difference between using a personal email or a business email for correspondence but on a much larger and more impactful level. You’re not a fly-by-night operation, and partners, investors and customers will respect the time and effort you put into getting the proper classification. You’ll look legitimate because you are.

Since many entrepreneurs don’t take this critical step, you could really stand out in your industry. It’s a good way to differentiate yourself.

You’ll Save Money On Your Taxes

Sole proprietors mix their business and personal income on one form and have to pay a self-employment tax out of pocket. By melding the two, you’re losing money. You’ll start to lose even more money as your business grows, and if left unchecked, you could be out several thousand dollars per year. Entities are taxed differently. Check out the options available to you, but more than likely you’ll want to opt for an “S” status where small businesses and entrepreneurs receive a tax break not afforded to sole proprietors or even LLCs.

If tax breaks are important to you, make sure you check with your accountant before making the switch. They’ll help you crunch the numbers and figure out what strategy is best for your financial situation.

You can make your business much stronger and more legitimate by using an entity. Funders, shareholders and customers will respect you more. You’ll most likely enjoy tax breaks, and on a personal level, you’ll shield yourself and your family from the devastating effects of a lawsuit or business financial ruin. Make the switch and save yourself money and headaches in the future.